C.7 Economies of scope

Description

This video explains what economies of scope are. We analyse how different production possibility frontiers show different types of economies (or diseconomies) of scope.

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The concept of economy of scope is very similar to that of economies of scale. When we talk about economies of scope, we mean that average costs are reduced by introducing another product into our portfolio that can share some of the infrastructure or know how, thus reducing overall average cost per product. It is essentially the same concept as economies of scale, but based on producing more than one product instead of producing more of the same one.

This can happen for various reasons. Firstly, because fixed costs do not increase proportionally with production but rather in stages, we can introduce a second production line that benefits from the common infrastructure whilst reducing average cost per unit.

We can also see a reduction in average variable costs. Employees can benefit from shared know how or from a certain skill set that can be transferred to a much wider range of products, raising productivity across the board. In this way, labour need not increase proportionally with production output, as it is the case for economies of scale. What we can also see here are skills being transferred from one production range to another, resulting in synergies that are unique to economies of scope instead of economies of scale.